High return and potential
acquisitions have caught the attention of international players

SHABBIR H. KAZMI
Mar 26 - Apr 01, 2007

The current financial year seems to be
a unique period in the history of Pakistan because of record foreign inflows and
completion of some high profile transactions in finance and telecommunication
sectors. Foreign private investment inflow into the country during July 2006 to
March 2007 almost doubled compared to the corresponding period last year. Both
foreign direct investment and portfolio investment witnessed almost the similar
phenomenon.

Figures show that the country received
total private foreign investment of US$ 3.952 billion during this period as
against US$ 1.992 billion received the same period last year. The
telecommunications sector received record inflow of US$ 1.234 billion which was
three times more than last year and highest investment so far in any sector of
the national economy. The mobile phone technology generated a boom and foreign
inflows rushed to capture the untapped market of 160 million people.

Foreign direct investment (FDI) during
the period rose to US$ 2.970 billion as against US$ 1.521 billion during the
same period last year. Similarly, portfolio investment rose to US$ 981 million
as compared to US$ 471 million last year. Sector-wise details of foreign
investment show that the financial sector remained the second biggest
beneficiary of current high inflows as it received US$ 572 million during the
eight months of current financial compared to US$ 243 million received last year
during the same period.

BANKING SECTOR

Banking sector reforms introduced by
the central bank are yielding very positive results. Aside from impacting depth
and efficiency of financial intermediation, the profitability of banks has
improved, attracting foreign interest and encouraging the existing owners to
expand and/or strengthen their businesses. Banks have not only cleaned up their
own balance sheets but have impacted real sector development in a number of
ways.

The strong performance of the banking
sector has attracted the attention of internal players. Some mergers and
acquisitions have already taken place, some are in the finalization stage and
talks about a few more are going on. The first one occurred in 2004, when Bank
of Ceylon merged with Dawood Commercial Bank - now Atlas Bank. The second one
also took place in 2004 when Credit Agricole merged with NDLC-IFIC Bank. The
most recent one is Standard Chartered Bank acquiring Union Bank for a
consideration of US$ 487 million.

The compliance with the Basel-II
framework, the central bank has raised the minimum paid-up capital requirement
for the commercials banks to Rs 6 billion to be achieved in a phased manner by
December 2009. Out of all scheduled banks only 22 are listed on the local stock
exchanges. This has fueled the process of merger and acquisition. Three banks
are already busy in finalizing the details and awaiting formal approval of the
central bank. Samba Financial Group of Saudi Arabia has entered into an
agreement with the management of Crescent Commercial Bank to inject additional
capital of Rs 6 billion. Tamasek Group of Singapore is busy in due diligence for
acquiring PICIC. The latest news is about ABN Amro Bank going through due
diligence for acquiring Prime Bank. All these transactions seem certain due to
the financial strength of acquirers and the urgent need to meet the enhanced
capital requirement.

Credit diversification has helped in
achieving higher degree of economic diversification. Of the total outstanding,
agriculture credit constituted 6.4% but more phenomenally, it grew by almost 4-5
times. Credit was also made available to non-crop sector by laying down
guidelines for promoting credit access to livestock, fisheries and dairy sector.
Improved access to SMEs was also possible and its share in total outstanding
grew significantly. Consumer financing, which was not available in the past,
rose to above 14% of the total outstanding. Companies' access to required level
of financing, foreign loans, swaps and derivatives etc. have all been
accommodated to allow market to innovate and expand. There is considerable scope
for banks to enhance their business through extending financial penetration and
outreach both across country and sectors.

Banking sector has grown both in size
and strength and is positioned well to meet economy's requirements as it grows.
Ownership and structural changes in banking system are facilitating this
process. Foreign interest and presence has grown and at present foreign stake
comes to 47% of total paid-up capital of all the financial institutions
regulated by State Bank of Pakistan. Structural changes have been significant.
Besides higher standards of corporate governance at management and board level,
the banks are adhering to SBP prudential regulations which are consistent with
BIS standards. Technology is being fast adopted and over 45% of bank branches
are connected with head office, along side growth in ATMs, debit and credit
cards.

Banking sector has to position itself
to extend its outreach, which will play a key role in sustainability and
diversifying risks. Besides bringing in much needed capital, increased foreign
presence is expected to help Pakistan integrate better globally and regionally,
enhance skills and techniques and transfer and increase usage of technology.

Private sector participation and
foreign investment are the cornerstone of Pakistan's future economic strategy.
During last two financial years Pakistan has cumulatively attracted US$ 8
billion foreign investment flows - 26.5% was sale proceeds of privatization and
49.2% from FDI, with remaining coming from foreign portfolio investment.
Prospects are that Pakistan will attract about US$ 6 billion during current
financial year. Going forward, foreign investment is expected to be more
diversified and will support infrastructure development, manufacturing, tourism
and hotel industry etc.

S.No

Months

2006-07

2005-06

2004-05

2003-04

2002-03

2001-02

2000-01

1

July

133.2

119.6

52.2

32.0

42.4

24.4

-13.0

2

August

242.2

106.2

56.6

40.4

30.4

26.4

26.0

3

September

653.6

102.9

72.3

44.5

97.4

21.9

22.3

4

October

207.3

137.0

94.2

53.4

228.9

46.9

20.3

5

November

239.7

268.4

52.4

46.6

63.0

42.0

46.8

6

December

393.6

369.2

117.3

60.2

78.3

43.5

44.7

7

January

226.4

123.4

70.0

62.4

53.1

20.0

23.3

8

February

276.9

82.6

45.3

37.2

29.4

28.7

9

March

721.1

195.0

247.5

27.5

32.9

33.2

10

April

795.5

98.9

128.1

37.7

20.2

26.7

11

May

191.8

138.2

142.4

48.8

22.1

28.1

12

June

309.0

494.3

46.6

53.3

155.0

35.3

Total

2,096.0

3,521.0

1524.0

949.4

798.0

484.7

322.4

ANALYSIS OF FOREIGN DIRECT INVESTMENT 2006-07

FDI Inflow during July - January 2007 $2,096 million
compared to $ 1,244.7 million during the corresponding period last year (68.4%)